Innovations in Wealth Management Technology: Best American non-bank for innovation

Using software to give clients an alternative to the traditional private bank model.

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FutureAdvisor


One of many advantages for a start-up in the financial industry is that it can think differently about how to solve problems. Take FutureAdvisor: its vice-president of product Adam Prewett comes from the video gaming industry.
  

"Not many people are aware but the video gaming industry is ahead of every other when it comes to giving people a good online experience," he says. "Games are about incentives that alter user behaviour."

FutureAdvisor is attempting to help those with between $100,000 and $1 million in savings to manage their wealth better. That means not only giving advice but altering their behaviour to help them get the best out of their investments.

Bo Lu started FutureAdvisor in 2010 as an online advisory platform and portfolio manager. He recognized a gap in the market: in the US, 60% of those with more than $1 million have an adviser, but it’s only 20% of anyone with less.

Bo Lu
Bo Lu

"In America, when it comes to wealth management, we seem to say: 'Hey, if you are rich, we will take care of you, and if you’re not, good luck’," says Lu. "The existing models for service delivery are too inefficient and too expensive to serve most people. The only way to fix that was with software."

FutureAdvisor looks at a user’s accounts – joint accounts, IRAs, mortgage and loans – and will calculate the 'correct’ portfolio and tax-efficient allocation for the user’s age, demographic and risk appetite. FutureAdvisor also offers a paid-for discretionary managed product, which will rebalance a user’s portfolio continuously between their accounts and investments. As much as possible, the user’s current funds are retained to avoid churning fees, and elsewhere index funds are selected. Already the firm has $240 million in assets under management, with 35 employees. It is particularly a hit among those in their mid- to late-30s who are starting to have more complex financial lives, but are not looking for a traditional adviser or the fees they charge.

FutureAdvisor is not only offering an alternative to traditional banks. Lu and his team have been smart in their consideration of behaviour. The firm has consulted with the team of Duke University professor Daniel Ariely, author of Predictably Irrational, to work out how investors react to advice.

Futureadvisor

For one, says Chris Nicholson, FutureAdvisor’s head of communications, when people feel like they have something taken away, they respond very strongly. So one way of getting through to clients is not by talking about the positives of passive investing or why they should use FutureAdvisor, but rather by showing them how much they are losing in their current situation every year.

The firm is also working on how to discourage the irrational behaviour of selling during a downturn and buying in a bull market.

Says Nicholson: "We are planning on putting processes in place that just remind clients to slow down and not act rashly; for example, asking them to sign up to having their spouse agree before they liquidate their accounts. That could provide a check and prevent unnecessary losses in case they panic."